The EU Commission has published a draft directive (ATAD 3) designed to tackle misuse of "shell entities". Essentially, these are entities resident in EU member states that do not have sufficient substance. The directive is likely to mean that many businesses will need to take steps to bolster the substance of their EU holding companies to prevent additional reporting or adverse tax consequences, and may increase the comparative attractiveness of the UK's new qualifying asset holding company (QAHC) regime (for more detail please see our QAHC briefing).
As discussed in more detail below, entities within the scope of the directive are subject to adverse tax consequences. There are also increased information reporting requirements which extend to entities at risk of being within scope as well as those that actually are.
Although the use of the term "shell" in the title of the directive may, for many, connote entities engaged in tax avoidance or "letterbox companies" with no substance at all, the basic scope of the directive is fairly wide, potentially catching many holding companies commonly used in business structures, so the various exemptions will often need to be considered carefully.
We set out below a flowchart to help businesses navigate the new rules and assess whether the directive is likely to apply to them.
Which entities are within scope?
The provisions would only apply to all entities that are tax resident in an EU Member State. There is no de minimis threshold or exemption for SMEs.
Entities are within scope if they pass through an initial gateway, designed to filter out those not at risk. The gateway looks at whether the entity carries out cross-border activities which are geographically mobile and has outsourced its day-to-day management and significant decision making. Those entities that pass through the gateway will be subject to additional reporting requirements. If the entity cannot prove that they meet substance requirements or claim an exemption, adverse tax consequences apply.